February 21, 2023
Good morning. Almost a year ago, Russia attacked Ukraine, with aims to quickly decapitate the government in Kyiv, install a pro-Kremlin puppet and present the West with a fait accompli.
- It didn't work. But the invasion sparked a grinding war and energy crisis, both of which amplified and altered the already massive shocks of the COVID era.
Today, in 1,130 words, or 4.5 minutes, we explore Russia-Ukraine-related economic developments of the last year, with an eye to how things did — and didn't — play out as expected.
1 big thing: Europe's shifting energy mix
It was a painful, expensive — and not entirely voluntary — transformation, but Europe has sharply cut reliance on Russian gas, Matt writes.
Why it matters: In the early days of the invasion, few thought it possible that Europe's economy could function without access to the relatively cheap, reliable supplies of Russian natural gas that countries like Germany had based large parts of their economy upon.
- Yet, Russia's share of the European Union's natural gas imports has fallen from roughly 40% just before the invasion to less than 10% in the early weeks of 2023.
Zoom in: The drop is the result of European sanctions on Russia along with Kremlin counter-embargoes which culminated in Moscow's decision to effectively cut off supplies of natural gas through the Nord Stream 1 pipeline to Germany in September.
- Other nations have rushed to fill the gap left by Russian gas, with imports of liquified natural gas surging from the U.S. and Qatar, among others.
- And so far, Europe has defied expectations for a recession, eking out a surprising bit of growth at the end of 2022.
Yes, but: The transition away from Russia has been incredibly costly.
- The initial shock of the invasion sent natural gas prices to unthinkable levels (see below) — forcing governments across the continent to shell out billions to bail out utilities and defray at least some of the crippling prices facing consumers.
- Even so, consumers across Europe continue to report serious declines in their standard of living, with nearly 40% of Europeans reporting difficulty paying their bills.
The bottom line: Russian President Vladimir Putin may have been betting that his dominance as an energy provider to Europe gave him enough power to do as he liked in Ukraine. But as new sources of natural gas come online to supply Europe, Russia's energy leverage is disappearing fast.
2. Charted: Price shock
Commodities markets, initially a key theater of operations for Russian aggression, have normalized to an extent few thought possible last year, Matt writes.
Driving the news: European natural gas prices have dropped to their lowest level since before the war in recent days, amid surging stockpiles of gas and expectations of continued mild weather that will decrease heating demand.
- And it's not just the gas markets that have normalized.
State of play: Global crude oil prices have remained relatively steady — hovering between $75 and $85 a barrel for most of this year, even after Russia announced plans to cut its oil production by about 5%.
- Prices for wheat — before the war, Russia and Ukraine exported a quarter of the world's shipments of the grain — have also fallen back to prewar levels, since diplomatic efforts have managed to reopen significant Black Sea wheat exports.
The bottom line: The world is adjusting to the economic realities of the post-COVID, post-Ukraine-invasion world.
3. Catch up quick
4. Russia's resilience in the economic war
The West enacted a never-before-seen level of sanctions and financial pressure on Russia, in an attempt to buckle its economy and destroy Russian public support for the war, Matt writes.
- The impact has been less than expected.
The big picture: The unprecedented combination of economic sanctions, embargoes, constraints on financial transactions, asset seizures, and never-before-used crude oil price caps has taken a toll.
- But Russia has found workarounds enabling its economy to continue to fund the war.
Flashback: Early on in the conflict, Western economic sanctions looked like they could seriously cripple Russia's economy, and potentially be an important — even decisive — factor in the war.
For example: In the days after the invasion, as Western sanctions ramped up, the ruble plunged by more than 40% against the euro and the U.S. dollar.
- Russians lined up to withdraw cash from ATMs in order to convert it to hard currency.
- The central bank jacked interest rates up to 20% in order to stop the run, threatening to cripple economic growth.
Yes, but: Russian economic technocrats have proved effective in keeping the wheels from falling off the Russian economy.
- High-interest rates, capital controls and leverage over banks allowed them to stabilize and then strengthen the ruble, and rein in inflation.
- Russia shifted crude shipments to big buyers like China, India and Turkey, ensuring cash continues to flow from energy sales.
- When necessary, it's started to tap its ample national reserve fund to pay for budget deficits.
- And Moscow has increasingly turned to North Korea and Iran as sources of weaponry that are no longer available from Western suppliers.
The latest: U.S. intelligence is warning that China is now considering sending arms and munitions to Russia, to enable it to continue the attack.
The bottom line: The West's effort to punish Russia economically has taken a toll. But a much smaller one than initially imagined.
- The IMF estimates its economy shrank 2.2% in 2022.
- But that's far less than the 8.5% contraction that the global economic body predicted Russia would suffer back in April of 2022.
💭 Our thought bubble: Economic pressure helps, but it was never going to be the deciding factor in a war involving states on the scale of Russia.
5. Ukraine's surprisingly resilient economy
Running a modern economy while also fighting a major land war on your own territory is almost impossible — and yet Ukraine has surprised almost everyone, including its own technocrats and economists, in being able to do exactly that. Axios' Felix Salmon writes.
Why it matters: Ukraine's economy has shrunk dramatically and tragically over the past year. But the country is still exporting goods and services, and is expected to return to growth this year.
By the numbers: Ukraine's economy shrank by 30% in 2022 — a huge drop, but significantly smaller than the 50% the finance ministry initially expected.
- Ukraine is still producing much more grain than it consumes, for instance, and is exporting more than 5 million tons of grain per month, per the NYT. That's down from about 8 million tons before Russia invaded.
- Ukraine's technology companies saw their revenues rise by about 25% in the early months of the war.
What's next: Ukraine's economy is likely to grow by a modest 1% in 2023 and then by 3% in 2024, per the latest forecast from the European Bank for Reconstruction and Development.
Between the lines: War isn't everywhere in Ukraine. The areas of the country seeing active combat accounted for less than 20% of GDP in 2021, per the EBRD.
- There was also some $120 billion in direct foreign aid to Ukraine through mid-November, with more since then and to come.
The bottom line: A surprising amount of economic activity can survive even a war against a superpower.
🇺🇦 1 last thought from Matt: The economic dimensions of war are important. But in a sense, they're almost beside the point. The war isn't about economics. It's about a smaller, free nation fighting to survive. Its costs, at least for anyone living in the comfort of the West, are almost inconceivable.
Russia has killed or injured 18,000 Ukrainian civilians. The Ukrainian military has suffered an estimated 100,000 casualties. That doesn't even take Russia's growing list of war crimes into account. Any discussion of the economic implications of the war pales in importance when compared to that kind of brutality.